Similar to the limits placed on contributions to retirement savings plans when you are working, the IRS also has regulations for how to take money out.
Because contributions are made with pre-tax dollars, the government doesn’t get their bite until you withdraw funds in retirement. Required minimum distributions (RMDs) were created to ensure that the funds are withdrawn, so the taxes can be paid.
It’s a pretty simple concept, for the last several years it’s been a little extra complicated by new regulations that are often changed or even waived before going into effect.
When Do RMDs Begin? How Should You Take Them?
The age that taking RMDs begins has risen several times over the last few years. It currently stands at 73. This will remain the age until 2033 when it will rise to 75. Why is the age you begin so important?
The IRS determines the amount of RMDs based on your account size and your life expectancy, among other factors. The percentage of RMDs increases each year as your account size theoretically decreases so that funds are continually withdrawn over your life and taxes can be paid.
If you turn 73 in 2024, you have a choice of taking your RMD by December 31, 2024, or postponing it until April 1, 2025. The postponement is only allowed in the first year you become of RMD age, so if you do push it off to 2025, you’ll end up taking two RMDs in 2025. It’s wise to think carefully about this, as the two distributions will count as income and may affect your tax bracket. Either way – it’s important to make a decision and follow through. The penalty for failing to take an RMD is 25% of the amount you have to withdraw, on top of the regular income taxes.
If your assets are in a 401(k) plan and you are still working at 73, you don’t have to take your first RMD until the year after you retire, as long as your plan allows for this.
If you’re like many people after a long career, you may have multiple retirement accounts. The rules are a little different if your retirement savings are in an IRA vs a 401(k). IRA rules allow you to calculate the RMD from each account, but take the total amount from only one account. 401(k)s require you to take the RMD from each account.
That means you have to consider several things in determining the timing and source of RMDs. Tax planning should ensure you keep your income level as low as possible because a higher income level can affect both social security and Medicare benefits and may trigger the Medicare surcharge. You’ll also want to consider your account investment strategies, to ensure you maintain adequate diversification and that your portfolio income and growth goals remain intact.
Roth 401(k) Accounts Get Aligned with IRA Rules
Roth 401(k) accounts now no longer require minimum distributions to be taken out, similar to Roth IRA rules. The funds can be left to grow with their tax advantages intact for the duration for the duration of the owner’s lifetime.
This is a nice benefit for people who did not open a Roth IRA account until they got ready to retire and decided to roll money out of a 401(k) to a Roth IRA to avoid RMDs. Those funds were then subject to the five-year rule, which limits withdrawing earnings on Roth IRA investments within five years of opening the account.
Giving an RMD to Charity Got More Generous
A qualified charitable distribution (QCD) is a vehicle for donating to charity and having it count as your RMD for the year. The total amount increased to $105,000 in 2024, up 5% over last year’s $100,000 limit. The advantage of the QCD is that it turns the taxable event of an RMD into a charitable donation that is not included in taxable income. For a married couple, this amount is $210,000.
The Bottom Line
Taking money out of your retirement plans may be more complicated than you think. There are different rules from when you were in the accumulation phase, and it’s important to understand all the implications for your long-term plan.
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